Lee Halpin: Forget Brexit, try the self-investment debate

Lee Halpin: Forget Brexit, try the self-investment debate

ALMOST three decades have passed since then Chancellor Nigel Lawson paved the way for the creation of Self-Invested Personal Pensions (Sipps). He famously announced he wanted to “make it easier for people in personal pension schemes to manage their own investments”.

But could the rules surrounding this simple concept of taking charge of your pension investments be due a rewrite?

Shortly we will see which consumer protection remedies the regulator intends to introduce to protect consumers from poor outcomes. This was identified as an emerging issue following the Financial Conduct Authority’s Retirement Outcomes Review of a market that is still evolving as providers - and the regulator - adapt to the pension freedoms.

But it is one floated measure that is completely at odds with the DIY concept of Sipp. This would require Sipp operators to offer ready-made investment solutions (referred to as ‘investment pathways’) to consumers. It is a move that would make Sipps, irrespective of their moniker, made to standard rather than made to order.

That said, we do need to acknowledge that poor investment choices or, worse still, inertia means lower income in retirement. Research found that more than 60 per cent of consumers not taking advice were not sure or only had a broad idea where their money was invested.

The regulator recognises that Sipp operators being required to provide ready-made investment solutions for investors would represent a “material intervention”. As such, stakeholders were invited to comment on the impact and practicality of the proposals.

But while the regulator is “minded” to apply investment pathways to the whole of the non-advised drawdown market, they have also sought views on limiting the scope. Exceptions applying to certified sophisticated and high-net-worth investors or to non-advised consumers who pass an appropriateness test have been suggested.

These would appear more proportionate measures. Not least as the regulator found that there is, on average, a higher level of engagement by consumers in Sipps and that consumers who opt out of a structured architecture have similar outcomes to advised consumers. This seems to suggest a broad-brush approach, where the associated cost may not deliver a benefit.

In the contrasting extreme scenario (where no exceptions would apply), this will likely mean Sipp operators that do not offer investment products that they run themselves withdrawing from the non-advised consumer market altogether.

Separately, we can expect further, much needed, clarity throughout the year on speculative and/or risky assets. More specifically, what case might a Sipp operator have to answer with regards to their process. A court judgment is expected, in the short term, on the issue of whether a Sipp operator is liable if a transaction is made in consequence of unregulated advice. This follows a judicial review last October that found in favour of the Financial Ombudsman Service (FOS) and upheld the view that Sipp operators have a fundamental obligation under the regulatory system to carry out due diligence on Sipp investments.

But the context of that case was an investment scam and there remains great uncertainty on what the FOS will deem as appropriate due diligence in a failed, rather than fraudulent, investment situation. While the regulator offered an insight into its expectations in 2014, crucially the judicial review upheld that it is entirely acceptable for the FOS to apply a Sipp operator’s overarching obligation to the facts in a way that is not spelled out in specific rules.

It also remains to be seen at what point a consumer cannot be completely absolved from taking on natural investment risk. Not least because the Financial Services and Markets Act 2000 requires consumer protection to be balanced with the general principle that consumers should take responsibility for their decisions.

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